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Pressures of early-stage venture capital time horizons

I have never liked the kind of artificial time pressures that early stage venture capital puts on a business. I understand that it is driven by the economics of venture investments, but it also creates tension: entrepreneurs are given a timeline to exit that is typically too short for the business to be fully developed and reach its highest value.

Wesley Clover makes investment decisions on its own without the influence of outside capital dictating time horizons. We have the luxury of being more passionate about building businesses and more supportive towards the entrepreneurs than typical venture capital firms.

After deploying a sound investment into an individual business, Wesley Clover typically waits 8–9 years for a company to exit. It can take a long time to build a business, and we do not want to force founders to sell early when there’s potential for them to expand more. This approach would not work for a typical Venture Capital (VC) fund where a 5–6 year investment window can force the business to sell before its really developed its value for investors to see a return.

When Wesley Clover thinks of investing, we ask ourselves “is this a market that makes sense to leverage? Can we justify outside capital to go after this market?” Often the answer to those questions is ‘no’. We do not manage people’s money like a typical VC fund would, we simply supply the capital ourselves and encourage outside capital to invest alongside us.

There’s one market, however, where these time horizons do not matter, and where quick turnarounds do well: the market of Digital Customer Acquisition (DCA).

As consumer needs change over the years, so do the ways of attracting and retaining them. Companies need to understand that Digital Customer Acquisition is an essential way of conducting business. The tools and resources you use to acquire your customers, such as Hubspot, Mailchimp, Salesforce, Unbounce etc. make up a rapidly growing market that I’m eager about investing in.

Using and relying on a traditional salesforce to turn leads into customers is a waste of both time and money. Today’s salesforce needs to be automated, or at least partially automated. Most of the world is already picking up on this idea. Forbes found that even back in 2012, 78% of sales people using social media sold more than their peers.

Performance marketing, in which advertisers and marketing companies are paid if and only if an action is completed, is a big reason why I like this market. You do not need to deploy a lot of capital until you know it’s working.

This also allows you to test without spending much money. You can pick a channel to invest time into (be it Facebook, Quora, blog posts, or LinkedIn) and enjoy seeing very clear metrics that indicate conversion rates and sales. Once you start deploying capital there’s an incredible opportunity to scale: if your $100 gets you 3,000 clicks, there’s a good chance $1000 will get you 30,000 clicks and a million will get you 30 million. You could scale it up or down quickly, according to the conversion rates.

Digital customer acquisition markets don’t need long time horizons. Typically the longer your capital is deployed, the more it costs you. Investing into digital customer acquisition means you do not have to wait 3 years to see if your thesis works. You can prove it easily by tracking marketing metrics early on.

The proof derived from customer acquisition metrics is not subjective: it’s objective and data driven. You are thus easily equipped with the data necessary to justify deploying more capital.

Everything that would normally scare me from investing in a traditional VC model: the 5–6 year time horizon, not knowing what your ability to return capital quickly is, and not being clear if your investment is successful, is reasonably addressed by going after DCA business.

The digital customer acquisition market is like a rising tide. It floats all boats. The market is comprised of many massive million dollar opportunities that need investment. An IDC report predicts that $32.2B will be spent on MarTech alone in 2018. Despite the enormous interest and need, these investments offer rapid return, data driven analytics that fuel more investment, and are typically profit focused from early on. It’s a great fit for typical VC investment models and long-term investments alike.

If you really want to create great companies and support entrepreneurs- which I’m most passionate about — but are restricted by short horizons and pressure for rapid returns, consider the digital customer acquisition space.

If your business isn’t employing it, employ it. If you’re not considering it as an investment opportunity, consider it. At the very least, pay close attention to this rising tide.

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Discussion

2 responses to ‘Pressures of early-stage venture capital time horizons

  1. Thank you for your insight on how VC work! And the important of DCA.

    I believe DCA also help young starter with little or no money to validate their idea, study how the market react and even acquire customers before having the product or service ready.

    Regards,

    • Testing product demand before manufacturing is a common approach for consumer focus businesses. It works well in many cases. You can start the process of acquiring customers and gauging interest before the product is available. Look at Kickstarter and Indiegogo. There are entire market places set up to do this, and it’s an important observation worth knowing. Thank you for your comment.

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